Behavioral Finance

Strategy Versus Outcome

The Seahawks had the ball on the 2 yard line with 26 seconds left in Super Bowl XLIX.  In their backfield was one of the greatest running backs to ever play the game, Marshawn Lynch.  Everyone knew the ball was going to him……except it didn’t.  A pass play was called, and the throw was intercepted by the Patriots to seal up another Super Bowl victory.  The call was immediately questioned by commentator Chris Collinsworth stating “I’m sorry I cannot believe the play call”.  Seahawks head coach, Pete Carroll, was blasted by the media for what has gone down as one of the worst play calls of all time.

Was the play call really that bad?  Or is it just being judged based on the unfavorable outcome?

According to Annie Duke’s new book, Thinking in Bets, it was a brilliant play call with a terrible result.  Imagine an alternative scenario where the play resulted in a touchdown and led to a Super Bowl victory, not only would the play call have never been questioned, it would have been heralded as one of the greatest ever.  I can envision the headlines that never happened like “Carroll’s pass call shocks the Patriots!”

Passing plays from that field position have only resulted in interceptions about 3.10% of the time since the year 2000, while running plays also resulted in fumbles 3.10% of the time.  During the 2014 season, running back Marshawn Lynch fumbled on about 1.50% of his rush attempts, and quarterback Russell Wilson was intercepted on 1.50% of his pass attempts.

The play call was a low risk/high reward bet.

The result of the play should not be a factor in deciding whether or not the call was good or bad.  Good calls can have bad results, and bad calls can have good results, but judging purely on the result is what Duke refers to as the “resulting fallacy”.

When luck plays a role in the outcome of an activity, you should not judge your decision making based on the result.  Author, Michael Maboussin, states that a skillful activity is one where you can lose on purpose.

For instance, if you are running a race, it is easy to run slower than everyone else and lose.  But if you are trying to lose a hand of poker on purpose, you may accidentally win due to luck alone (assuming you don’t fold).

Professional poker players do exhibit skill, but luck still plays a major role.  In professional poker, it would not be unusual to see an amateur beat the best players in the world.  However, if you match the best chess player in the world against an amateur, they would never lose.  Chess involves very little luck.

If I have my 2 year old son, Sawyer, pick 10 stocks from a hat and compare the returns over the next year to the top professional money managers, due to randomness alone there is a chance he will do better.  However, it is not a wise long-term strategy to use Sawyer’s picks to build and preserve your wealth.

We see a lot of resulting in finance through common statements like:

“I should have invested that money 6 months ago”  (If the market went up while you waited)

“I should have bought a CD instead of investing money” (If the market drops shortly after an investment you’ve made)

“I should have bought bank and auto stocks in March of 2009”

A good financial planner will put clients in a position that gives them the best odds of success over time.  The short-term results are not always what make us happy, because a portion of them will always be beyond our control.  It is important to understand the decision making process, monitor the plan, and make adjustments only to help increase chances of achieving personal goals.

Any opinions are those of the author and not necessarily those of RJFS or Raymond James.  Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.  Holding investments for the long term does not ensure a profitable outcome.  Raymond James is not affiliated with and does not endorse the opinions of Michael Maboussin, Annie Duke, and her book Thinking In Bets.